Good afternoon, everyone. My name is Kelly, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q3 Holdings Third Quarter 2022 Financial Results Conference Call. I would now like to turn the call over to Mr. Josh Yankovich, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for the third quarter 2022 conference call. With me on the call today are Matt Flake, our CEO; David Mehok, our CFO; and Jonathan Price, our Executive Vice President of Emerging Businesses, Corporate and Business Development. This call contains forward-looking statements that are subject to significant risks and uncertainties, including with respect to our expectations for the future operating and financial performance of Q2 Holdings. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q to be filed this week and subsequent filings and the press release distributed this afternoon regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the Investor Relations section of our website and in our Form 8-K filed with the SEC this afternoon. Let me now turn the call over to Matt.

Thanks, Josh. I'll start today's call by sharing our third quarter results and highlights from across the business. I'll then hand it over to Jonathan to provide more insights into our emerging businesses activity. From there, I'll discuss how we're adapting to the current market influences before handing it off to David to walk through our financial results and outlook in more detail. In the third quarter, we generated non-GAAP revenue of $144.9 million, up 14% year-over-year and 3% sequentially. We also added over 700,000 users to our digital banking platform, a year-over-year increase of 9%. That brings us to approximately 20.9 million total registered users. We delivered strong sales execution in the third quarter, highlighted by a digital banking enterprise deal and 5 Tier 1 wins with both new and existing customers. Our emerging businesses also had solid activity in the quarter. We signed a new Helix customer that opens a new vertical for us and launched key client programs. We're seeing Innovation Studio, our award-winning SDK and partner ecosystem continue to play an important role in our digital banking sales' success. And finally, we announced the acquisition of Sensibill in early October, a leading customer data platform designed to unlock actionable insights to help financial institutions and fintechs better serve their customers. With that, let me unpack our sales highlights in more detail. I'll start with digital banking, where we signed 3 Tier 1 deals and landed an enterprise win with a top 50 U.S. bank. Q2 participated in a highly competitive selection process to win this marquee enterprise deal, and the bank will now use the Q2 platform for their commercial and small business clients. It's worth noting that this is the largest deal we've signed in the last 3 years, and our proven ability to expand enterprise relationships beyond the initial bookings is one of the many reasons we're excited for the long-term potential of this partnership. One of the Tier 1 wins from the quarter was with a $6 billion bank that will also utilize both our retail and commercial solutions. This bank was looking for a technology partner that's not only a best-in-class commercial provider but one that could also support their acquisition roadmap. They selected Q2 because of our differentiated commercial offering, our speed of innovation and our track record of helping acquisitive customers grow. We also saw significant cross-sell activity in the quarter. First, an existing Tier 1 credit union customer purchased our retail solutions to add to their Q2 commercial offerings, effectively building out their full digital banking suite on Q2's platform. Similarly, we also expanded our relationship with a top 50 U.S. credit union that added our commercial banking solution to their existing retail banking suite and extended their contractual terms as part of the deal. Digital lending also had a solid quarter, including a Tier 1 win with an agricultural lender who's looking to implement a new commercial loan pricing tool to better assess the risk and profitability of their commercial relationships. This win represents our second Tier 1 deal in the agricultural lending space this year, so we're encouraged by our growing traction and credibility in this promising vertical. We also landed a cross-sell deal with a large Tier 1 bank that began utilizing our loan pricing solution last year. The success of that initial loss led them to expand their use of our loan pricing platform. This deal demonstrates the multiple expansion opportunities we see with our loan pricing capabilities. In this case, the customer added licenses, enabling more of their lending staff to utilize our solution. And they added a new product module, both of which meaningfully grow the size of this partnership beyond the initial booking. Overall, I'm pleased with our sales performance across digital banking and lending in the quarter. We believe our digital banking platform is well positioned competitively across retail and commercial, as highlighted by the deals we discussed. And on the digital lending side, we're executing meaningful net new expansion wins. We are seeing Q2 Catalyst, our end-to-end commercial solution set resonate with customers and prospects for its ability to help them manage commercial relationships through the digital channel, from pricing a relationship to onboarding new commercial clients to serving and growing those relationships over time. In fact, every one of the enterprise and Tier 1 customers I just discussed is leveraging at least one of our Q2 Catalyst solutions to enhance their commercial strategy. And we believe this ability to help our customers digitize these critical relationships across loans and deposits is highly differentiated in the market. In summary, our sales execution across digital banking and lending remains strong. Our product portfolio is resonating. We saw our win rate improve. We are executing meaningful net new and expansion opportunities, and our pipeline suggests that demand for digital transformation remains strong. Now I'll hand it over to Jonathan to walk through our emerging businesses highlights from the quarter.

Thanks, Matt. I'll start with Helix, where we signed net new and cross deals and launched key programs in the quarter. First, we signed a digital life insurance company that offers a unique savings account with competitive benefits. As our first partnership within the insurance vertical, this deal showcases yet another opportunity for us to partner with innovative companies, no matter their industry, seeking to provide compelling alternatives to traditional offerings through embedded finance. We also had multiple clients launch their Helix-powered programs in the quarter. One of these program launches was with Mana, an online gaming company looking to offer personalized banking services to their users, including checking accounts and debit cards. As we've discussed in the past, program launches with our Helix clients are significant events as this business model is designed to generate incremental, usage-based revenue driven by user growth and adoption. So with Mana's partnerships in the gaming space, unique distribution model and engaged user base, we're excited to help unlock the potential of this program as it scales. Another development in the quarter was with an existing customer that expanded their relationship with us, adding an incremental program supported by a new issuer processor and bank of record, an initiative they determined only Helix could support. Not only does this program generate additional revenue for us, it also demonstrates how Helix can help clients leverage multibank environments or deployment models as they seek out greater optionality, risk mitigation and business continuity. I'm also pleased to report that Q2 Innovation Studio continues to help us secure wins across the business. Consistently cited as a differentiator by prospects, Innovation Studio has now shifted beyond that. It's become an integral component in nearly every digital banking deal we signed. And its impact is two-pronged. Not only have the number of deals citing Innovation Studio increased, but we're also seeing an uptick in our digital banking win rate overall, which we believe is correlated to the value that the financial institutions see with Q2 Innovation Studio. Furthermore, from our growing pool of customers who've adopted Innovation Studio, now over 60% of our digital banking customer base, more of them are integrating with multiple partners at once, contributing to more immediate value for the financial institutions, their customers and Q2. And as of early November, we have hit the milestone of 100 partners signed with Q2 Innovation Studio, providing high-quality solutions that our customers can deliver to their account holders with speed and highlighting the ecosystem's value for innovative companies looking to amplify their go-to-market strategies. Finally, as Matt mentioned, we recently announced the acquisition of Sensibill, whose machine learning platform captures and categorizes granular spending data that can help small businesses and consumer account holders better understand and manage their finances. We believe the addition of Sensibill will complement the capabilities of Q2 Catalyst, strengthening an already differentiated commercial offering and will enhance our comprehensive data portfolio. Sensibill's mission to make financial wellness attainable for all aligns seamlessly with our mission, and we're excited for the benefits in terms of both talent and technology that this addition will bring to the business. Because of Q2's strong business model and balance sheet, we're able to capitalize on opportunistic acquisitions like Sensibill. And with that, I'll hand it back over to Matt to discuss the current macro backdrop.

Thanks, Jonathan. I'm pleased with the sales execution from the quarter, and my conversations with our customers indicate that digital transformation remains a top strategic priority for financial institutions of all sizes. As we noted on our last earnings call, we have continued to monitor the challenging macroeconomic environment, and we are seeing some larger financial institutions slowing certain discretionary spending due to ongoing macroeconomic uncertainty. For example, in the third quarter, several key customers began to defer discretionary services projects with us. We have also observed shifting market dynamics in Europe, which has faced a particularly challenging sales environment. As such, we will prioritize profitable growth and focus our go-to-market efforts in regions with more favorable demand environments but continue to provide outstanding support to our customers in Europe. Considering all these dynamics and our increased focus on profitability, we are revising revenue and EBITDA guidance for the remainder of the year, which David will discuss in more detail shortly. Taking a longer-term view, I remain confident about the opportunity in front of us. The fundamentals of this business haven't changed. We are competing well, we are extending and expanding customer relationships, and our pipeline suggests that demand for digital transformation solutions remains strong. Given these strengths, we expect subscription revenue growth, the vast majority of our revenue base, to accelerate in 2023. And with an emphasis on cost management, we expect to drive expanding EBITDA margins in '23 as well.

Thanks, Matt. Our revenue for the third quarter came in below our guidance range, predominantly driven by pressure on our transactional and lower margin services revenue streams. However, we also saw an acceleration in our higher-margin subscription revenue. Despite total revenue coming in below our guidance, our adjusted EBITDA results exceeded the high end of our guidance due to proactive cost management and a more favorable revenue mix. Additionally, our ARR, backlog and user growth continue to give us confidence in the continued acceleration of higher-margin subscription revenue. I'll begin by reviewing our results for the quarter and conclude with updated guidance for the fourth quarter and full year of 2022. Total non-GAAP revenue for the third quarter was $144.9 million, an increase of 14% year-over-year and 3% sequentially. The year-over-year increase for the quarter was primarily driven by an increase in subscription revenue resulting from customer go-lives, specifically within our digital banking business, where we had more go-lives take place in the third quarter than during the entire first half of the year. Transactional revenue represented 11% of total revenue for the quarter, down from 14% in the prior year period and 13% in the previous quarter. The year-over-year and sequential decline in transactional revenue was largely driven by a decline in transactional volumes within our digital banking and Helix businesses. Usage-based revenue in our Helix business declined from prior quarters, and some of our customers observed elevated transactional volumes during the spring tax season. This, combined with the continued year-over-year contraction of our bill pay business, is putting greater than expected downward pressure on transactional revenue. Services and other revenue was 15% of total revenue for the quarter, down from 16% in the previous quarter. Services revenue is below expected levels due to a decline in customer spend on professional services and consulting, which was concentrated to some of our larger customers. These types of projects are generally more discretionary in nature. Annualized recurring revenue or ARR grew to $633.7 million, an 18% year-over-year and a 3% sequential increase. The year-over-year growth was primarily from net new and cross-sell bookings within our digital banking and lending businesses. The sequential growth was also driven by the bookings success in the quarter, partially offset by the decline in usage-based transactional revenue. While ARR can have limitations as a key performance indicator, we believe it serves as a better barometer for net new and cross-sale bookings given that our backlog metric can be inordinately impacted by the seasonality of renewal activity. We ended the quarter with approximately $1.4 billion in backlog, an 8% increase year-over-year and a sequential increase of approximately $22 million. The year-over-year and sequential increase in backlog was largely the result of net new and renewal bookings. Gross margin for the third quarter was 52.1%, up from 51.9% in the third quarter of 2021 and 51.3% in the previous quarter. The year-over-year and sequential improvement in gross margin was attributable to an increased mix of higher-margin subscription revenue resulting from go-lives during the quarter. The sequential gross margin improvement was also the result of improved efficiency of resources delivering and supporting our solutions. Total operating expenses for the third quarter were $69.8 million or 48.2% of revenue compared to $62.4 million or 49.1% of revenue in the third quarter of 2021 and $67.4 million or 48% of revenue in the second quarter of 2022. The year-over-year percent of revenue decrease was predominantly driven by improved R&D cost scaling in addition to a reduction in recruiting expenses and spending with third-party contractors. The slight sequential increase in operating expenses as a percent of revenue was driven by an increase in headcount concentrated within R&D and sales and marketing. Adjusted EBITDA was $10.8 million, up from $7.3 million in the third quarter of 2021 and $9.7 million in the previous quarter. Our adjusted EBITDA overperformance relative to our third quarter guidance was attributable to a more favorable mix of higher gross margin revenue and effective cost scaling. We ended the quarter with cash, cash equivalents and investments of $395.7 million, down slightly from $399.3 million at the end of the second quarter. Cash flow generated from operations for the third quarter was $6.1 million, which benefited from effective working capital management. We generated negative free cash flow in the quarter of $3.9 million. Based on enhanced profitability projections and normal seasonality, we expect fourth quarter cash flow from operations and free cash flow to be positive. As Jonathan mentioned, we believe our cash position and projected future cash flow generation affords us the ability to evaluate capital deployment opportunities while continuing to ensure we're in a position to service our convertible debt balance, the vast majority of which does not come to maturity until late 2025 and 2026. Let me wrap up by sharing our fourth quarter guidance and updated full-year guidance. We forecast fourth quarter non-GAAP revenue in the range of $148.4 million to $150.4 million. We're updating our full-year non-GAAP revenue guide to the range of $568 million to $570 million, representing year-over-year growth of 13% to 14%. This guidance incorporates our revised revenue expectations taking into account the impact we're seeing to discretionary services and transactional revenue. We forecast fourth quarter adjusted EBITDA of $10.5 million to $12.5 million, and we're updating our full-year 2022 adjusted EBITDA guidance to the range of $39 million to $41 million, representing approximately 7% of non-GAAP revenue for the year. Despite the revenue headwinds we're observing, we're still able to produce meaningful adjusted EBITDA driven by a more favorable revenue mix and proactive cost management. Also incorporated into our guidance is the impact of Sensibill, which we acquired in October. We expect Sensibill to generate low single-digit millions in revenue and low single-digit millions in adjusted EBITDA loss for the full year of 2023, with an immaterial impact to Q4 of 2022. As we continue to go through our 2023 planning process, I want to share our preliminary view on our expectations based on the trends we're seeing and the proactive measures we're taking. We continue to believe our subscription revenue will show an accelerated growth rate for the full year 2023 as a result of the bookings success we've observed year-to-date, our sales pipeline and the strength of leading indicators like ARR. However, we believe that subscription revenue growth will be partially offset by reduced expectations for our transactional and services revenue as well as our reduced expectations for Europe. Based on what we're seeing in the second half of this year in transactional and services revenue, we anticipate our total revenue growth rate in 2023 will be relatively flat to the full-year growth rate implied in our revised 2022 guidance. Despite this reduced total revenue outlook, we do expect an acceleration of subscription revenue growth and expanded adjusted EBITDA margins for the full year 2023.

Thanks, David. In closing, I want to emphasize the strength of our execution from the quarter. We had our strongest bookings quarter of the year, signed new customers across our lines of business and had meaningful wins in digital banking, digital lending and Helix, including 5 Tier 1 deals and the enterprise win, the latter being our single largest deal since 2019. While we believe our recent sales execution and the state of our pipeline signal a positive demand environment, we continue to monitor the changing economic backdrop and its impact on our customers and are focused on profitable growth and driving adjusted EBITDA margin expansion. And long term, I remain extremely confident in the future of this business. Our financial model is strong. Our product portfolio is highly differentiated, and financial institutions continue to prioritize digital transformation across their businesses. Thanks. And with that, I will hand it over to the operator for questions.

We'll hear first today from Andrew Schmidt with Citi.

I want to start up on the discretionary spend piece. Could you just kind of talk about what types of discretionary spend are being deferred? And then just by my math, I think we've seen discretionary spend and transactional revenues might be about an $8 million headwind in the fourth quarter. Just curious how to think about that layering in on a quarterly basis going forward.

Yes, Andrew, thank you for your question. The types of discretionary spending we are noticing being affected are not related to implementation decisions. Instead, they concern staff augmentation, such as back-office automation and efficiency projects. Customers are choosing to automate processes that involve human labor, which incurs additional costs during that transition. As a result, we are observing a reduction in those types of agreements. This includes rebranding initiatives and some readiness consulting projects that have influenced discretionary spending. With 190 customers having revenues exceeding $5 billion and over 100 exceeding $10 billion, we are seeing these trends in service projects. That summarizes what we are observing in terms of discretionary spending.

Yes. To address your question about 2023, we're anticipating continued pressure on discretionary services based on our current understanding. We're projecting this outlook into 2023. On the transactional front, we're dealing with ongoing challenges in bill payments, which have proven to be more significant than we initially expected this year. Additionally, Helix, which relies heavily on transactions, has seen a shift from licensing to a more transactional approach over the past year. As transaction volumes decline and user acquisition slows among some customers, we experience a downturn in our transactional revenue. These factors combined are what we mean when we discuss the pressure on transactions as we head into 2023.

Matt and David, that's very helpful. Regarding margins in 2023, the previously expected adjusted EBITDA was 300 to 400 basis points. I'm trying to understand the factors affecting mix for next year and the emphasis on efficiency. Is that still the correct perspective on margin expansion, or is there more to consider given our revenue dynamics and efficiency focus? Any insights on how to approach margin expansion would be appreciated.

Yes, Andrew, qualitatively, you're spot on. I mean those are going to be some of the key drivers. The mix of revenue, which we see improving towards higher profit revenue streams in 2023 relative to what we originally expected as well as very prudent cost management. Those two things combined are going to result in the EBITDA expansion we referenced. We're not going to quantify that at this point, so don't want to get into too much detail. That's something that we're working on diligently right now. We're right in the middle of the planning process. So we'll give you a lot more color and detail on what that EBITDA profile looks like in February.

I have one more question about the transactional side. Can you clarify whether the decline is due to fewer business transactions or a decrease in retail or individual transactions? I'm trying to understand where there might be some current weaknesses in the model.

Yes, Joe, this is a consumer retail driven phenomenon for us based upon what we're seeing. This is not a commercial-driven issue.

Got it. And then on the Helix and the life insurance win, maybe you could kind of delve a little bit more into the use case there given they're not a bank, they are a financial institution, a little bit different. But just to get a feel for that value proposition and how it works outside of the bank channel.

What they're aiming to do is quite similar to what other embedded finance clients and prospects are pursuing, which is to engage more with our customers and discover new ways to collaborate with them for monetization. In this instance, they plan to introduce an embedded savings program. Given the current interest rate environment, this opportunity is appealing. There's nothing particularly unique about being in the life insurance sector that sets this model apart; it's more about the various sectors where there are opportunities to connect with clients on financial services in a manner that goes beyond their primary insurance business.

Got it. And then just maybe just if I could ask one more kind of on the macro here. It's kind of early in this potential slowdown in the economy. Obviously, interest rates are higher. Some of the banks should be able to see some rising net interest margins over time. Matt, kind of how are discussions going on your types of deals with the banks as they are looking at this kind of potentially more uncertain economic outlook as we look into '23?

Yes, thanks, Joe. If you look at the quarter, the pipeline, and the ARR growth, we had a fantastic quarter. Digital transformation remains a top priority. We secured the largest deal since 2019 with a top 50 U.S. bank for a commercial contract. We also signed three Tier 1 banks, including one retail and one commercial. Additionally, we achieved success on the lending side of the business. Jonathan just highlighted the Helix win, indicating that digital transformation is in progress. We feel well positioned to leverage the tools, products, and our customer base for this. However, we are noticing a slowdown in discretionary spending, primarily from 190 customers with over $5 billion in assets who are being cautious. The economic environment is complicated, and these institutions are avoiding risks and ensuring they have plans in place to avoid trouble. They are preparing for potential charge-offs or loss reserves, especially considering a stricter regulatory environment, leading them to be careful with controllable expenditures. Despite this, the demand environment appears strong. Our pipeline has increased by 50% year-over-year in the fourth quarter, showing many positive trends and a significant need for digital transformation.

So I wanted to get your comments on Europe. You're certainly not the first company to reference weakness in the area. And while I don't want to put words in your mouth, it almost sounded like you were referencing Europe as a potential area where you could pull back on some spend and focus some of your cost containment efforts. So I guess with that, I was hoping you could just comment on how you think about the future in the region as well as what you're seeing there.

Yes, Chuck, the demand environment has been challenging since we entered it. Starting from January 2020 with Cloud Lending and later with PrecisionLender, we noticed a slowdown that has persisted due to the economy, the ongoing war, and other circumstances. As a result, we decided to let go of some less profitable revenue and reduce our go-to-market expenses. Our focus remains on supporting our existing customers and continuing product innovation, but we needed to cut costs in this area. We are not abandoning it, just taking a more patient approach given the demand situation. The pandemic demonstrated that we can operate remotely as well, so we had to make tough decisions in this environment. Thus, we reduced our go-to-market expenses, which also allows us to care for our customers and innovate while finding ways to save money.

I understand. You've received some inquiries regarding the margin guidance. Looking at the midpoint for the fourth quarter, it's slightly below our previous expectations, even though the third quarter exceeded our EBITDA forecasts. I'm interested to know if this is due to lower transaction revenues anticipated moving forward. Could you elaborate on the factors influencing the margin guidance for the fourth quarter?

Yes, sure, Chuck. The way to think about it is that we are looking at approximately an $8 million decrease for the quarter. This decrease will mainly come from services that are discretionary, which account for about 40% of it. Another third will be from transactional sources, and the remaining portion will come primarily from Europe. These are the three categories to consider. Each of these categories has different margin profiles, which relate to the implied EBITDA guidance we mentioned earlier in the call.

Got it. If I could ask one more question, it seems that you've effectively managed cross-selling over the past few quarters. Previously, you've mentioned that this has positively impacted the overall margin. As we look towards 2023, while you are cutting costs in some areas, can we expect to see a boost from a shift in business mix towards cross-selling in the next year or two?

Yes, Chuck, I think that's a safe bet. We're doubling down our customers, getting it in front of them as much as we can. We have a lot of solutions that can solve a lot of their problems in digital transformation. We've got a great relationship with our customers. Our NPS score is as high as they've been in a long time. And so cross-selling products to these customers, it was the game plan before the macroeconomic conditions, and so you're seeing us really run that play nicely. And the team, the customer success team is doing a great job of it.

Curious, when you look at the downtick in discretionary spending and weaker transactional and services revenue, is that something you encountered from the start of the quarter? Or was that something that popped up later on towards the end of the quarter?

Yes, Parker, it really started towards the middle of the quarter. And we immediately took proactive actions in regard to making sure that we were focusing on some areas of what we do control, and that's cost. And as we looked into Q4, we looked deal-by-deal with the pipeline and saw some of those opportunities start to push out or at least get delayed. We don't know how long those delays are going to be. And as a result, we've given you what we truly believe is the Q4 outlook for the revenue associated with that. And then we've extrapolated that into what we believe to be a reasonable growth rate on that discretionary business into '23 incorporated into that high-level outlook we provided.

Got it. And I know it's very early and we're not even in 2023 yet, but from your initial conversations with customers, is their expectation that the current conditions persist through all of 2023? Or is there some hope that maybe we end up stabilizing midway through the year and maybe the back half of the year looks a little bit better?

Parker, it's one of those things where I think there's so much going on right now that everybody is trying to predict what's going to happen next summer, it's a little tough. So I think right now, people are just trying to focus on the information that's coming in and making the best decisions they can. I haven't had a lot of conversations. I think most people would argue that for the consumer, it's going to get tougher in the back half of '23, not easier based on what you're seeing with jobs and inflation and interest rates. But it's an environment that our customer base takes a step back and becomes pretty conservative, and that's what you see in the discretionary spending that's going on.

And with that, that will conclude today's conference. We do thank you all for your participation, and you may now disconnect.